AGS Transact Technologies Limited (NSE:AGSTRA) May Have Run Too Fast Too Soon With Recent 30% Price Plummet

AGS Transact Technologies Limited (NSE:AGSTRA) shareholders won't be pleased to see that the share price has had a very rough month, dropping 30% and undoing the prior period's positive performance. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

In spite of the heavy fall in price, AGS Transact Technologies' price-to-earnings (or "P/E") ratio of 37.8x might still make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 19x and even P/E's below 10x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

For example, consider that AGS Transact Technologies' financial performance has been poor lately as it's earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for AGS Transact Technologies

Although there are no analyst estimates available for AGS Transact Technologies, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as AGS Transact Technologies' is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 55%. The last three years don't look nice either as the company has shrunk EPS by 58% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's an unpleasant look.

In light of this, it's alarming that AGS Transact Technologies' P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From AGS Transact Technologies' P/E?

Even after such a strong price drop, AGS Transact Technologies' P/E still exceeds the rest of the market significantly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that AGS Transact Technologies currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for AGS Transact Technologies (1 can't be ignored) you should be aware of.

Of course, you might also be able to find a better stock than AGS Transact Technologies. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.